Mastering Interest Rates

‘When America sneezes the whole world gets the flu’

Covid -19 taught homeowners and property investors a great lesson about crowd psychology, two years ago interest rates were at an all-time low, the country was at a standstill and money was cheap. Cash is usually cheap when an economy is thriving and yet we had money being lent out at an affordable rate when most of the economy was at a standstill, the number one lesson Warren Buffet preaches when t comes to mastery of personal behaviour with money is to “go against the crowd”; when interest rates go down sell your property/ get out of the property market, while others are fighting to get into the market and when interest rates go up get in because most people will be looking to get out of the property market because of affordability. Interest rates like every financial instrument have moments of decline and moments of incline, it is interesting to see globally what happens with interest rates, globally we usually have America either increasing or decreasing the interest rates/ lending rate, and then the UK/ Europe follows with the same decision a week later, then South Africa follows the global standard with the same move on the last Thursday of the same month. When America drops or increases the lending basis points expect the world to follow the same strategy. In South Africa, the announcement usually happens on the last Thursday of the month just like a Petrol price increase or decrease is announced on the first Tuesday of every month.

If you are a homeowner or a property investor in South Africa, it works in your favour because you can pick up the pattern and make a decision, if you expect an interest rate hike you can adjust and ensure that the debit order goes off before the last Thursday of the month, as that is when the interest rate change will occur, by having the debit order go off earlier you pay less in the monthly payment whilst still keeping up with the total repayment schedule, this allows you to create extra cashflow in your finances it follows the same pattern as Petrol Price change, the change in South Africa always occurs on the first Tuesday of the month whether it is going up or down. By knowing these patterns you can redirect your monies into instruments that will work in your favour.

Duplicate the Credit Card System to pay off personal Loans

There are three key factors to every loan, 1. The amount being borrowed, 2. The interest rate and 3. The number of years of repayment. For instance, let's say you borrow 100 000 @ 10% interest repayment for 5 years. The bank or the person loaning out the money wants a total of 110 000.00 return of payment, it's calculated as 110 000 divided into 5 years, divided into 12 months which gives you the monthly repayment amount of 1833.33 per month. On the credit score or lending system it shows that you borrowed 100 000.00 on an interest of 10%. The 110 000 is created by the person who lent the money, this means that you have to actually create an economical value of 110 000 of real money in order to pay back the lender on the 100 000 that was made available to you.

Credit cards work in a very fascinating way: you pay back interest on the outstanding amount on the loan. Let's assume you paid off 20 000.00 from the original loan of 100 000 with an interest of 10% on your credit card. Your monthly repayment will will be recalculated as; 80 000.00 on 10% for 5 years and the repayment will be 1466.66, your monthly repayment will decrease to that amount. On a normal loan such as a revolving credit loan you will have to physically readjust the amount: let's assume you took the same amount of 100 000 and you have paid off the same amount of 20 000 on a 10% interest charge the same way as in the previous example of the credit card in order for you to pay a lower monthly amount you will have to instruct your bank and reapply based on the total amount outstanding and you will pay a lower monthly amount on the loan (1466.66), this is key especially when interest rates decrease, you will be paying a lesser amount because you are effectively reapplying for a new loan at a lower premium based on the outstanding amount. There is a downside to this in terms of your credit score, it reflects that you paid off a lower amount on your credit rating.

The benefits of you doing this are: you create extra cash flow and the extra cash flow that is created can be used to be put into your savings/ investments or used to pay off the loan.

The extra money that you use to pay the loan translates to you paying less in interest as the number of years taken to pay off the loan is less and the extra amount covers the total or a portion of the interest that is being charged on the loan.